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Edwards Beats Q2 Earnings Estimates

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Edwards Lifesciences Corporation’s (EW - Analyst Report) second-quarter 2013 adjusted EPS rose 22.4% year over year to 82 cents, reflecting a beat of 7.9% over the Zacks Consensus Estimate. Adjusted EPS was also ahead of the company’s guided range of 75–79 cents. Apart from healthy sales growth, the EPS growth was led by a lower tax rate, reduced share count and significant margin expansion.

Net income jumped 38.8% from the year-ago quarter to $94.1 million in the second quarter. The prior-year quarter includes the impact of the recall of heart valves and catheters and a special charge for the upfront licensing and royalty fees associated with the licensing of intellectual property.

Revenue Details

Edwards reported sales of $517.2 million, up 7.3% year over year (up 10.3% at constant exchange rate or CER). The top line was ahead of the Zacks Consensus Estimate of $514 million. The result was in line company’s expectations of $500−$550 million.

Domestically, sales were $240.5 million, up 16.2% year over year while internationally, sales were $276.7 million, up 0.6% (up 6.0% at CER) year over year. In the overseas market, sales in Europe improved 6.9% at CER to $155.3 million while revenues from rest of the world shot up 10.4% at CER to $62.1 million. However, sales in Japan decreased 0.6% at CER to $59.3 million. This reflects another quarter of poor performance in Japan.

Segments

In the second-quarter 2013, surgical heart valve therapy product group reported sales of $204.3 million, up 1.9% year over year (up 5.1% at CER). This is a marked improvement from the first quarter when segment sales declined. The second-quarter performance reflects solid worldwide performance with robust contributions from the U.S. and Europe. While domestic sales increased on the back of higher heart valve procedures, revenues from Europe were helped by strong contributions from INTUITY valve.

Globally, transcatheter heart valves (THV) product group reported sales of $182.1 million, up 24.9% year over year (up 25.2% at CER). Revenues of this product group were mainly driven by the ongoing launch of the SAPIEN valve in the domestic market and healthy growth in Europe. For the first time in over a year, THV sales improved in Southern Europe. Including the net stocking orders of $1 million and clinical sales of $10 million, domestic sales stood at $90 million.

Critical care product group sales were $130.8 million, down 3.6% year over year (up 1.9% at CER). The constant currency growth was led by advanced monitoring products. However, the downside in sales was attributed to lower distributor inventories in China for another quarter and the end of Edwards’ ACCESS portfolio.

Margins

In the second quarter, gross profit spurted 11.4% to $392.2 million. As a result, gross margin expanded 280 basis points (bps) to 75.8% in the quarter. The expansion in the gross margin was a result of favorable product mix and positive impact of foreign exchange. However, it was partially offset by lack of manufacturing discipline.

Selling, general and administrative expense increased 3.8% year over year to $189.4 million (or 37.3% of sales), primarily due to the U.S. Medical Device Excise Tax and transcatheter valve expenses in the domestic market.

Research and development expenditure increased 8.8% year over year to $80.5 million. The higher expenses were on account of various active clinical studies for Edwards’ heart valve and pipeline development efforts. Despite higher operating expenses, operating margin expanded 380 bps to 23.6% in the quarter.

Cash Position

Edwards exited the quarter with cash, cash equivalents and short-term investments of $575 million compared with $521.4 million at the end of 2012. Long-term debt of the company was $227.3 million compared with $189.3 million at the end of 2012.

Operating cash flow was $127 million while capital spending came in at $28 million. Consequently, free cash flow was $99 million in the second quarter. Edwards repurchased almost 2 million shares for $139 million during the quarter. The company’s consistent share buyback activity reduced outstanding shares by 3.1% from the year-ago quarter, leading to a positive impact on the bottom line.

Guidance

Following the second quarter, Edwards maintained its guidance for 2013. Annual sales are expected in the range of $2.0−$2.1 billion. For 2013, the Zacks Consensus Estimate is pegged at $2.04 billion.

The company also retained its EPS outlook in the range of $3.00− $3.10 for 2013. The current Zacks Consensus Estimate of $3.06 lies within the guidance range.

On a segment basis, the company expects to register CER growth in the range of 2%–5% for surgical heart valve therapy product group in the ongoing year. Critical care product group sales growth is forecast in the band of 2%–4% at CER. On the other hand, THV sales growth forecast lies in the range of 25%–30% for 2013.

For the third quarter of 2013, Edwards envisages revenues in the range of $475−$505 million while the adjusted EPS is projected in the band of 63−67 cents. The Zacks Consensus Estimate for sales is $488 million while the same for EPS is 71 cents for the ongoing quarter.

Our Take

After a disappointing start to 2013, things are looking up for Edwards as it surpassed the Zacks Consensus Estimate in the second quarter with several positive takeaways. Of late, the flow of good news for this medical device maker remains uninterrupted. Earlier this month, Edwards won a patent infringement case over Medtronic’s (MDT - Analyst Report) CoreValve, a close competitor in Europe.

Unlike the past several quarters, the company recorded healthy performance in Europe, especially for the THV franchise. Although inventory problems in China are a cause of concern, Edwards should gain momentum in the region as distributor inventories in China attain target levels.

Furthermore, the company witnessed procedural growth in the U.S. We also believe that Edwards can turn around its performance in Japan following the commercialization of Sapien XT and other product launches. With lucrative product approvals and expansion of geographic foothold, the stock appears to be an attractive pick.

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